Closure of Toyota raises many (old) issues

The closure of Toyota should come as no surprise. Australia is not a place where anyone can make standard cars competitively.

There are three areas to be interested in this story, which is a VERY LIKELY candidate for the exam in November.

* Why Australia is an expensive place to make cars

* Whether governments should provide assistance to declining or uncompetitive industries

* The winners and losers from putting a tax on imports

There are so many issues here that I can't attempt to talk about them in one post, but I will return to each in the future and expand upon each heading.

For now lets think about why the car makers say it costs them four times as much to make a car in Australia than in Asia and twice as much as in Europe.

One issue is the Minimum Efficient Scale of production. The Economies of Scale of car making mean that as the size of a plant increases the long-run average cost of production falls. But unlike the 'text-book' examples Diseconomies of Scale never occur meaning that there is a point at which every additional unit of production costs the same. This is shown in the diagram below.

 

For the Australian car makers the scale of production never reaches the quantity MES, (Minimum Efficient Scale) indeed it is probably at best 40% of that quantity.

Although there are other factors to consider, such as comparatively low productivity and high wages in Australia, the small scale of production is  major reason why the car making industry was always doomed.

The Guardian has an excellent article which connects most of the relevant issues.

The Guardian article is here